A Hollywood Ending for Multiplex Owners

Attendance is rising just as chains have cleaned up their debt

For theater-chain owners in the past few years, life has been a cliffhanger. Spurred by easy money and swept up by the media-consolidation craze, they went on buying sprees, snapping up smaller chains and piling on debt to build multiplexes on what seemed like every street corner in America. By last year, four of the largest U.S. chains were in Chapter 11, including such well-known names as Loews, United Artists, and Regal (RGC ). "It was our version of the perfect storm," says Peter C. Brown, CEO of AMC Entertainment Inc., which dodged bankruptcy but closed 30 theaters and slashed capital expenditures.

But now it looks as if chain owners might close out the year with a Hollywood ending. The hottest box office in years is driving up attendance this summer just as many theater chains are emerging from bankruptcy with scrubbed balance sheets. Suddenly, the economics have never been stronger in the world of sticky floors. Attendance so far this year is running 15% ahead of last year, says box-office tracking firm Exhibitor Relations Co., at a time when there are 1,200 fewer theaters than in 1999. Box-office sales are up by 19% so far this year, to $4.54 billion.

Longer lines this summer, like those for Spider-Man and Star Wars: Episode II--Attack of the Clones, are giving theaters leverage to raise ticket prices by an average of 5%, to as much as $10.50 in high-traffic areas such as New York City. So while advertising woes have savaged the media giants, theater chains are enjoying their moment in Wall Street's sun. AMC's shares are up 20% so far this year, to about $14.

Other theater chains owe their second act to the bankruptcy courts, which allowed them to wash away mountains of debt and onerous leases. The chains overbuilt and borrowed heavily in a misguided attempt to get larger, figuring that the hot box office of a few years ago would keep growing. By 2000, there were 37,000 screens in the U.S., one-third more than five years earlier, even as movie attendance had begun to slide. Operating margins, never huge, shrank, and debt calls got tougher to meet. "There were too many underperforming theaters and a lot of leases we couldn't swallow," says Martin A. Durant, CFO at Carmike Cinemas Inc., which came out of bankruptcy in January after closing 136 theaters.

Now, theater chains are showing new life. Carmike's operating margins were 13% in its most recent quarter, up from 2% a year ago. That boosted its share price sevenfold, to about $24, from its post-bankruptcy price of $3.50 a share. The hot market for these stocks has allowed the chains to raise equity to reduce debt. Cinemark Inc., a Plano (Tex.) chain with 3,000 screens, has filed to raise $184 million to pay down its debt.

The improving picture lured vultures, led by billionaire Philip F. Anschutz, who paid cents on the dollar to buy and then combine the bankrupt Regal, United Artists, and Edwards chains to create the nation's largest theater outfit. After its initial public offering opened at $19 on May 9, Regal Entertainment Group shot up. It now trades at around $24.

The turnstiles are likely to keep turning, at least for a while. In the post-September 11 world, folks aren't straying far from home, making movies a cheap option to long trips. And with more likely blockbusters due later this year, such as sequels to Harry Potter and the Sorcerer's Stone and The Lord of the Rings, box-office sales are expected to surpass $9.2 billion this year, a 10% jump, says Exhibitor Relations President Paul Dergarabedian. Better yet for theater owners, Hollywood is starting to turn out more family-oriented movies, which have more kids dragging their folks to the movies. It also doesn't hurt that studios are spending more to market potential hits, helping to drive traffic to the theaters.

Still, the chains depend on Hollywood to get the hit formula right. And efforts to find new revenue sources have been largely unsuccessful. Some companies are using their theaters for business conferences. Others are experimenting with beaming in sports or live events. "We tried a Destiny's Child concert and got six folks in Kansas City," says AMC's Brown. "We're still searching for alternative revenues." Until then, movies are the hot ticket.

By Ronald Grover in Los Angeles

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